Question

A farm equipment manufacturer is considering two types of controllers for one part of its production facility.  Alternative 1 will have an equipment cost of $83,440, an installation cost of $39,086, annual M&O costs of $7,690, and a $6356 salvage value after 18 years.   Alternative 2 will have an initial cost of $170,000 (including installation), an annual operating cost of $35,000, and $10,000 salvage value after its 8 year life.  At an interest rate of 6.8% per year, the annual worth of the two alternatives are closest to

Answer 1

Answer :-

Alternative 1 :-

Given that ;

Initial Cost including Installation;

= $83,440+$39,086 = $1,22,526

M&O cost = $7,690

n = 18years & salvage value = $6356

i=6.8 %

In order to calculate annual worth of both the alternatives, we have to go through the process (see figures for calculations)

Alternative 2